1. Which of the following is true of an efficient market?
a. 0 There is one seller
b. 0 There is one buyer
c. 0 Stock exchanges are always open
d. 0 There is always a low brokerage fee
e. 0 Information is reflected in security prices immediately

2. Which of the following is a primary financial goal of an organization?
a. 0 Having zero debt
b. 0 Increasing market share at any cost
c. 0 Maximization of shareholder wealth
d. 0 Keeping expenses constant
e. 0 Increasing sale prices each year

4. Which of the following ratios would tell an investor about the profitability of the organization?
a. 0 Acid test ratio
b. 0 Debt ratio
c. 0 Return on equity
d. 0 Times interest earned
e. 0 Current ratio

6. Which of the following is a method by which securities are distributed to final investors?
a. 0 Negotiated purpose
b. 0 Commission or best effort basis
c. 0 Direct sale
d. 0 Competitive bid purchase
e. 0 All of the above

7. Which sector of the economy supplied the largest amount of funds in US financial markets in the second half of the 90's?
a. 0 State governments
b. 0 Corporate business
c. 0 U.S. Government
d. 0 Foreign
e. 0 Household

8. What is a cash budget?
a. 0 Detailed plan of future cash flows
b. 0 A budget that shows only what cash comes in
c. 0 A historical look at cash flows
d. 0 A report that analyzes the cash account
e. 0 A report that analyzes the accounts receivable

10. If an organization collects 30% of sales within a month and the balance two months after the sale, how much would it collect in March if it sold 60,000 in January and 80,000 in February?
a. 0 20,000
b. 0 64,000
c. 0 140,000
d. 0 66,000
e. 0 52,000

12. What is present value?
a. 0 The money you have now
b. 0 The money you have before paying taxes
c. 0 The money you will get next month
d. 0 The current value of a future sum
e. 0 The future value of a current sum

13. How much will you have at the end of three years if you put away $2500 at the end of each year, and you earn 4% on your money?
a. 0 $7500
b. 0 $8000
c. 0 $7805
d. 0 $7800
e. 0 $7750

15. Which of the following is a shortcoming of the payback period as a capital budgeting criterion?
a. 0 It's easy to calculate
b. 0 It doesn't use free cash flows
c. 0 It ignores the time value of money
d. 0 It uses accounting profits
e. 0 It's easy to understand

16. Net present value is the preferred method to evaluate capital budgeting projects because:
a. 0 It requires detailed long term forecasts of cash flows
b. 0 It is sensitive to the choice of discount rate
c. 0 It ignores the time value of money
d. 0 It is consistent with the goal of shareholder wealth maximization
e. 0 It is difficult to explain

19. Which one of these determining factors of the size of a firm's accounts receivable is under the control of financial managers?
a. 0 Credit and collection policies
b. 0 Percentage of credit sales to total sales
c. 0 Permanent growth in sales
d. 0 Seasonal growth in sales
e. 0 Nature of the business

20. A project has an initial outflow of $10,000. The project will generate free cash flows of $8,000 per year for two years. The discount rate is 8%. What is this project's net present value (NPV)?
a. 0 $4,250
b. 0 $6,000
c. 0 $4,264
d. 0 $16,000
e. 0 $8,000

21. According to the hedging principle, seasonal increases in inventory should be financed with:
a. 0 Long term loans
b. 0 Short term loans
c. 0 Spontaneous financing
d. 0 Common stock
e. 0 Bonds

22. What happens to the cost of debt for firms with debt as their corporate tax rates increase?
a. 0 kd increases
b. 0 kd decreases
c. 0 kd remains the same
d. 0 kd can either increase or decrease depending on the amount of debt
e. 0 kd can either increase or decrease depending on the percent debt represents of the
entire capital structure

23. What is the Weighted Average Cost of Capital (WACC) for a firm where debt is 40% of the firm, preferred stock is 10% of the firm, common stock is 50% of the firm, after-tax cost of debt is 8%, cost of preferred stock is 12%, and cost of common stock is 18%?
a. 0 12.00%
b. 0 12.38%
c. 0 12.67%
d. 0 13.40%
e. 0 16.33%

24. What is a "good" reason for a firm to go public?
a. 0 Private equity investors get to share new wealth with public investors
b. 0 Founders share, on an equal footing, the good (and bad) fortune of the firm with new
shareholders
c. 0 The firm gains future access to the public capital market (it is easier to go back a
second and/or third time)
d. 0 Everyone involved faces legal liability
e. 0 Private investors lose a degree of control of the organization

25. What was a downside of debt financing cited by current Federal Reserve Bank Chairman Ben Bernanke over 15 years ago?
a. 0 There is a theoretical incentive to choose riskier projects over safe ones
b. 0 Highly leveraged firms which suffer losses can find themselves in financial distress
and possibly bankruptcy
c. 0 The need to meet interest payments may force management to take a very short-run
perspective
d. 0 Firms in financial distress may cut back production and employment, and lose
customers and suppliers
e. 0 All of the above

Solution Preview

See attached file for additional details.

MULTIPLE CHOICE. Choose the one answer for the question.

1.Which of the following is true of an efficient market?
b. 0 There is one seller
c. 0 There is one buyer
d. 0 Stock exchanges are always open
e. 0 There is always a low brokerage fee
f. 0 Information is reflected in security prices immediately
Ans: e 0 Information is reflected in security prices immediately

2. Which of the following is a primary financial goal of an organization?
a. 0 Having zero debt
b. 0 Increasing market share at any cost
c. 0 Maximization of shareholder wealth
d. 0 Keeping expenses constant
e. 0 Increasing sale prices each year
Ans: c0 Maximization of shareholder wealth

4. Which of the following ratios would tell an investor about the profitability of the organization?
a. 0 Acid test ratio
b. 0 Debt ratio
c. 0 Return on equity
d. 0 Times interest earned
e. 0 Current ratio
Ans: Return on equity

6. Which of the following is a method by which securities are distributed to final investors?
a. 0 Negotiated purpose
b. 0 Commission or best effort basis
c. 0 Direct sale
d. 0 Competitive bid purchase
e. 0 All of the above
Ans: All of the above

7. Which sector of the economy supplied the largest amount of funds in US financial markets in the second half of the 90's?
a. 0 State governments
b. 0 Corporate business
c. 0 U.S. Government
d. 0 Foreign
e. 0 Household
Ans 0 Corporate business